Question

Why is important to understand what motivates employees to commit fraud when you are planning to investigate the fraud scheme?

Answer 1

It is important for Investigator’s to understand what motivates people to commit fraud so they can better assess risk and assist employers or clients in implementing appropriate preventive and detective measures. One element common to most occupational fraud offenders, from the CEO to the rank-and-file employee, is that almost none of them took their jobs for the purpose of committing fraud—they are typically first-time offenders.

Facing that fact, one must ask the logical question: How do good people go bad? An obvious answer is greed. But many so-called greedy people do not lie, cheat and steal to get what they want. There are two separate but related theories about why employees commit fraud. The first is based on a 20-year-old Hollinger and Clark study of 12,000 employees in the workforce. It found that nearly 90% engaged in “workplace deviance,” which included behavior such as goldbricking, workplace slowdowns, sick time abuses and pilferage. On top of that, an astonishing one-third of employees actually had stolen money or merchandise on the job. (Remember: Even top executives are “employees.”)

WAGES IN KIND

The researchers concluded the most common reason employees committed fraud had little to do with opportunity, but more with motivation—the more dissatisfied the employee, the more likely he or she was to engage in criminal behavior. One criminologist described the phenomenon as “wages in kind.” All of us have a sense of our own worth; if we believe we are not being fairly treated or adequately compensated, statistically we are at much higher risk of trying to balance the scales.

A second theory about why employees commit fraud is related to financial pressures. In the late 1940s, criminologist Donald R. Cressey interviewed nearly 200 incarcerated embezzlers, including convicted executives. He found the great majority committed fraud to meet their financial obligations. Cressey observed that two other factors had to be present for employees to commit fraud. They must perceive an opportunity to commit and conceal their crimes, and be able to rationalize their offenses as something other than criminal activity.

Here are just two examples of situations in which it would have been beneficial to know what pressures were behind the fraud.

An investor spent his life savings gaining control of a 100-year-old public company that manufactured vacuum cleaners. After installing himself as CEO, the investor introduced a completely new product line. But the new vacuums were vastly inferior to the old ones, and consumers returned them to the factory in droves. Rather than credit the inventory account for returns, the CEO simply rented off-site space to store the junk vacuums. When the scheme got too big to control, the executive saw the futility of continuing the scheme, so he confessed to the authorities. Inventory was overstated by $40 million. The independent auditors were sued for malpractice, and the business folded. The CEO went to jail. Investors lost everything. The CEO’s motivation? He had hocked everything he owned to acquire the company. The auditors hadn’t—and couldn’t have—known that.

According to legend, a loyal bookkeeper for a company was denied a $100 monthly raise. The bookkeeper was incensed, so he methodically stole for the next 20 years, until he retired. His replacement discovered an amazing fact: The retired bookkeeper had pilfered exactly $100 a month—the precise sum of the raise he had requested.

OPPORTUNITY IS KEY

The lesson in these stories is that fraud does not occur in isolation. All crime is a combination of motive and opportunity . The opportunity to commit fraud is typically addressed through internal controls—if the proper checks and balances exist, it is more difficult (though still not impossible) to defraud an organization.

To deter opportunity, divide responsibility. If one person controls both the books and the assets, the ability to commit fraud is limited only by that person’s imagination. But if another employee shares a task, it is less likely a perpetrator can succeed. Furthermore, if an employee needs help to defraud an organization, opportunity is greatly reduced. It is one thing to commit a fraud by yourself, quite another to ask someone to aid in your scheme.

Some argue that internal controls are simply not enough to deter fraud. They cite two reasons: First, controls are supposed to provide only reasonable assurance. Second, there are few controls that cannot be overridden or circumvented by people with sufficient motivation.

The body of research into why “good” employees turn to fraud can be distilled into at least two important concepts. Employees and executives who feel unfairly treated sometimes believe they can right the scales by committing occupational fraud and abuse. Workplace conditions are therefore a major risk factor in predicting fraud. Also, employees faced with embarrassing financial difficulties pose a significant problem. The simple moral to the auditor is to pay attention to what goes on outside the books, too. So while you’re looking at the numbers, keep one eye and both ears open for disgruntled or financially strapped employees. It may mean all the difference in detecting fraud.